Ross Running Shoes issued ten $1,000 bonds with a stated annual rate of 10 percent on June 30, 2012. These bonds mature on June 30, 2015. The bonds have an effective interest rate of 8 percent, and interest is paid semiannually on December 31 and June 30.

Required:

(a) How much must Ross Running Shoes invest in a bank on June 30, 2012, at an annual rate of 8 percent, compounded semiannually, to meet all the future cash flow requirements of these bonds and have no money left after repaying the principal on June 30, 2015?

(b) Prepare the entry to record the interest payment on December 31, 2012. Assume that the company uses the effective interest method.

(c) Prepare the entry to record the interest payment on December 31, 2012. Assume that the company amortizes an equal amount of premium each year (i.e., straight-line method).

(d) which method (effective interest or straight-line) of amortizing the premium will allow Ross Running Shoes to recognize the higher amount of net income in 2012?

(e) Which method (effective interest or straight-line) of amortizing the premium will allow Ross Running Shoes to recognize the higher amount of net income in 2015?